UPDATE 1-Sri Lanka police arrest two over alleged bond scam

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(Adds remand order)

COLOMBO, Feb 4 (Reuters) - Sri Lankan police said on Sunday they had arrested two officials from primary dealer Perpetual Treasuries Ltd, which was named in a report as being involved in an alleged government bond scam in 2015.

Police arrested Arjun Aloysius, owner of Perpetual Treasuries which more than half the bonds in a 2015 auction were sold to, and Perpetual CEO Kasun Palisena. Aloysius is the son-in-law of Arjuna Mahendran, who was central bank governor at the time of the auction in question.

The arrests came a month after President Maithripala Sirisena said a panel had recommended legal action against the finance minister and central bank governor of the time, and the owner and officials of Perpetual Treasuries.

Sirisena said the presidential commission of inquiry had concluded that Perpetual Treasuries had profited through illegal means.

Mahendran, Aloysius, and Perpetual Treasuries have denied any wrongdoing.

Police Spokesman Ruwan Gunasekara said they had arrested Aloysius and Plaisena on Sunday “as part of ongoing investigations on the bond issue”.

“The CID has reported the facts to the magistrate court and made the arrest. The two will be produced before the magistrate.”

They were later remanded in custody until Monday by a local court.

Opposition lawmakers have alleged the bond auction cost the state more than $1 billion because of rising borrowing costs but Palisena, in a letter to parliamentarians last week, said state institutions had not lost out in the bond sale. ($1 = 154.2000 Sri Lankan rupees) (Reporting by Ranga Sirilal; Writing by Shihar Aneez; Editing by Toby Chopra)